Given that history has proven time and again that the majority of the electorate in each country (spurred by their respective media houses)
favors non-cooperation, the greatest gains in political capital are
made by indulging in non-cooperative behavior. Hence, as rational
actors, both Prime Ministers, Narendra Modi and Nawaz Sharif chose to
respond through retaliatory military action. Given this, the Nash
equilibrium is (2, 2). In a standard IS-LM framework, this is a
sub-optimal solution for the citizens of both countries as it results in
greater spending on military and less investment on consumer goods.
This reduces the overall welfare of the citizens of both countries, a
situation which would be avoided if both parties to co-operated (3, 3).
The domestic narrative of each country constructs the other as ‘the
enemy’. Thus, inaction by the incumbent government in the face of
aggression by the other country is perceived as “cowering down”. This
results in the loss of domestic political capital for the inactive
government while the aggressor gains domestic political capital.
Following the signing of the Tashkent Treaty (which ended the 1965 war
between India and Pakistan) General Ayub Khan lost political control
over Pakistan and was ousted by the opposition. In India, former Prime
Minister Manmohan Singh continued to engage with Pakistan diplomatically
post the Mumbai 26/11 attacks. He was perceived as being soft on
terror, a factor which has been argued
to have contributed significantly to the loss of UPA II to the NDA in
the 2014 elections. Thus, the worst outcome for India is when India
co-operates and Pakistan doesn’t (1, 4) and vice versa for Pakistan
(4,1).

But the outcome from non-cooperation is only a precursor to a
longer-term outcome of potential escalation. India’s strategies must be
informed by its beliefs in Pakistan’s strategy set, which in turn are
contingent on an analysis of Pakistan’s payoffs. While the Nash
equilibrium tells us that escalation of matters will take place between
India and Pakistan, the degree of escalation is a function of Pakistan’s
payoff from war (probability of winning (P) minus the cost of war (Cp)) and the payoff from backing down (x), as Pakistan is the first mover in this case. Pakistan will indulge in war only if its payoff from war (P- Cp) is greater than the payoff from backing down (x) i.e.

P – Cp>x

The probability of winning increases with the presence of strong
allies, the formal support of the international community, past military
spending, and the strength of espionage (proxied by the networks of ISI
for Pakistan and RAW for India). The cost of war includes cost of human
capital (that is, subjective valuations about the value of human life
vis-à-vis that of the state), equipment, war taxes, and losses due to
reduction in trade.

A ‘soft coup’
has been in effect in Pakistan since August 2014 which has strengthened
the position of the army vis-à-vis the elected government. Prime
Minister Nawaz Sharif is fast losing domestic political capital,
exacerbated by the corruption probe ordered against him by the Supreme
Court in connection to the Panama papers. The tenure of the current Army Chief Raheel Sharif will conclude by the end of November and all the prospective candidates “want to exhibit their credentials in terms of their previous and current operations against India”. In addition to the above, non-state actors play a co-operative game with the ISI
to destabilize Kashmir, where they may gain significant political
capital due to the on-going discontentment with the Indian government in
the valley. The last factor reduces the payoff for Pakistan for backing
down. The remaining factors provide the aforementioned parties to
collude and increase the anti-India rhetoric to gain political capital
as this diverts attention from the failure of domestic policy to
increase the welfare of the Pakistani people. Such an approach reduces
the value of individual human life and liberty vis-à-vis that of the
state and thus reduces the cost of war. This increases the payoff from
war as compared to the payoff from backing down.

However, the first mover in a bilateral conflict loses international
political capital as it is seen as an aggressor who poses a threat to
the prevailing world order. Thus, post the Uri attacks Pakistan has
faced almost complete international isolation. In conjunction with the persistent growth rate of about 3%, this implies that Pakistan currently lacks the financial capacity to support its threats of war.

Thus, the ‘surgical strikes’ by India will not result in deterrence
of counter strikers by Pakistan as, given the inability of Pakistan to
participate in full scale war, Pakistan will continue to escalate
matters through an increase in the number of encounters along the LoC.
However, a change in the status quo with respect to international
relations will require a reexamination of this crisis bargaining
scenario.